Fintech Disrupters Are Thriving in Nigeria; Ready for the Next Level
Background: FinTech 1.0, from 1866 to 1987, was the first period of financial globalization supported by technological infrastructure, primarily transatlantic transmission cables. Then the second wave from 1987–2008, Fintech 2.0, during which financial services firms increasingly scaled to paperless processes.
Since 2008, a new phase of FinTech has emerged in both the developed and developing world. This era is defined not by the financial products or services delivered but also by who delivers them. This latest evolution of FinTech, led by start-ups, poses challenges for regulators and market participants alike, particularly in balancing the potential benefits of innovation with the possible risks of new approaches. FinTech disruption have been primarily prompted by the pursuit of economic development and these developments are inherent to discerning the Fintech landscape in Nigeria.
While we can start to spill out the discouraging stats; for example: Population without a bank account — 40 percent; Commercial bank per 20,000 people- 1 branch; Bank ATM per 16,000 people — 1 ATM . It clearly tells that the thoughts of financial inclusion peddled by the Nigerian Federal Government is not going to be a reality anytime soon. The result, however of this inconsistency between physical and digital infrastructure also means the future for digital financial services in Nigeria is particularly bright. Already, Interswitch Nigerian fintech Unicorn has, in under 15 years, become Africa’s largest payments provider. The lack of physical infrastructure and of customer expectations regarding banking constitutes an opportunity, which could see the development of a new paradigm in Nigerian banking and of course the trend towards digital banking is already underway.
Over the past three years in Nigeria, there have been 30 million new Internet banking customers, a 10 percent increase in new personal bank accounts, and a 20 percent increase in online payments. In addition, it is expected that by 2020 there will be 60 million digital banking customers, compared to 20 million in 2012.
Let’s have a look at the landscape of Fintech in Nigeria to understand more about what’s going on.
The Fintech Race
Notwithstanding, the enormous opportunity available to digital payment service providers in Africa, challenges still arise and this challenges mandate a collaborative approach. Fintech companies provide numerous opportunities for Financial Service Institutions (FSI’s) to augment their service offerings and not only additional revenue or its operational cost reduction approach but to simplify and optimise their core processes and reduce inefficiencies in their operations. Financial services that do not recognise the impact of FinTech will face fierce competition and as FinTechs become more innovative such firms will be left behind in their strides and play “catchup”. According to The Economist, majority of financial institutions are either ignoring the threat posed by FinTechs or talking about the disruption without making any changes. This is because they are not capable of challenging the dynamic innovation FinTechs pose or they are reluctant to change.
Corresponding to 2017 Nigeria Fintech survey report by PwC Investment to African fintech start-up’s is estimated to have increased by a CAGR (Compound Annual Growth Rate) of over 58 percent between 2014 and 2016 to $800m (from $200m), and could possibly be valued at $3bn by 2020; with Nigeria and South Africa receiving a significant portion of this investments. Clearly it is not only these FinTech’s innovative driven technology altering the payments landscape in Africa but with this significant backing, the fintech ecosystem is recasting the competitive landscape and blurring the lines that define major players in the financial service industry. With recent developments, It’s apparent that traditional banking giants are embracing the chaos.
A recent McKinsey report found that widespread adoption and use of digital finance could increase the gross domestic product (GDP) of all emerging economies by 6 percent, or US$3.7 trillion, by 2025. According to a Statista report on the emerging African FinTech market transaction value in the “FinTech” market amounts to US$59,776m in 2017. Transaction Value is expected to show an annual growth rate (CAGR 2017–2021) of 17.3 percent resulting in the total amount of US$113,269m in 2021. The market’s largest segment is the “Digital Payments” segment with a total transaction value of US$53,455m in 2017. The number of potential users is expected to amount to US$150.9m by 2021.
“A lot of African banks erroneously see “Fintech” as a threat instead of an opportunity. The banks are the largest platforms for Fintech innovation. Fintech needs banks to thrive. It will not replace banks or banking. It will only change the customer experience. A lot of Fintech innovations are typically usability enhancements of existing bank products and features. Fintech is what unlocks the value in the previously low margin retail or consumer layer.”
Regulator Turned Competitor
The Nigerian Inter-Bank Settlement System (NIBSS), in November, 2016 infamously launched a new payment platform Mcash that allegedly improves the Nigerian Payment System. According to the Central Bank of Nigeria’s quarterly report on financial inclusion it was launched in collaboration with several “Deposit Money Banks(whatever that means)” and Mobile Network Operators.
The initiative will support the achievement of the targets set in the National Financial Inclusion Strategy, particularly the 70 percent payment target for adult Nigerians by the year 2020. NIBBS Plc was incorporated in 1993 and is owned by all licensed banks including the Central Bank of Nigeria (CBN) continues to leverage on the USSD code to process transaction while USSD is often regarded as an archaic hangover from the days of feature phones. Reluctantly suggesting USSD is the only technology that works for most Nigerians is far fetched.
According to the National Bureau of Statistics, the channels through which these payments were directed included checks, National Electronic Funds Transfer (NEFT), automatic teller machine (ATM), point of sale (PoS), internet (web), NIBSS Instant Payment (NIP) and mobile payments,a breakdown of the figures showed that in July, a total of 77.615 payment valued at N5.713 trillion were conducted through the electronic channels while in August and September, 82.256 million and 79.017 million payments valued at N6.922 trillion and N5.520 trillion were respectively made via the electronic channels.
The Disruptors and the Posers
Cutting through the buzz around financial technology ,according to PwC analysis, financial service incumbents believe that by 2020, 23 percent of their business could be at risk due to FinTech innovation by 2020. Fintech startups are undoubtedly having a moment but there’s a thin line between building what people really want and getting lost in the “Fintech bubble”. The disruption horn has been tooted for so long that startups have relegated innovation the hovering theme that powers Fintech. There is no disruption without innovation. Whether these “posers” like it or not they must innovate around government regulations and maintain customer retention.
The last few years have been marred with talk of unicorns and disruptive technologies. But some markets haven’t shown any dramatic transformational change, especifically in the case of fintech companies. Investments have risen to grotesque levels, causing valuations to soar up to about 50 percent higher than everything else and startups must ensure a return on investment or risk acquisition. However, Investors must understand that there is a fundamental strategic contradiction between tech and finance, the tech nature of rapid scaling is at odds with the slow pace of ROI in the finance and lending sector in particular. There are over 44 fintech companies and startups vying for a turf in the Nigerian fintech ecosystem. Luckily, there are a lot of financial problems for everyone to solve, derivative companies all vying for the same money that all do more or less the same thing in more or less the same way. Yes, “ Go forth and clone”. Of the 44 companies, a large number of them are skewed towards 2 major services.
1. Payment-infrastructure platform: This subset consists of the biggest financial players. They are about that life. These are the actual disrupters to the traditional Financial Service Industry FIS. They understand that African challenges should be solved locally while thinking globally. These companies understand the bread and butter of financial technology.
Interswitch, the behemoth of digital payments in Africa is gearing towards its first IPO listing on the London Stock Exchange LSE. However their obsolete switch processors reflect how traditional banks are reluctant to change and instead paying their way out of the disruption bubble.
Flutterwave is a set of unified APIs and tools that instantly enables businesses to accept and manage online payments. Since its nascence, Flutterwave has gone ahead and anonymously created several fintech products. Some of these products almost look the same. Flutterwave’s contribution in bringing in new and innovative ideas and inclusiveness cannot be underestimated.
2. Money transfer: The king of financial inclusion. True financial inclusion isn’t just payments only. Money transfer helps a street merchant gets access to income protection. These companies include primarily peer-to-peer platforms to transfer money between individuals across Nigeria in real-time. The reinvigorating question is whether or not Nigeria is a card nation.
In Nigeria, only a small percentage of upper-income households enjoy the convenience of card-based, online, mobile banking payment options,while most consumers pay with cash. Arguably over 30 money transfer startups have launched operations in the last three years and interestingly these startups have processed a combined transaction of 500 billion naira since Q3 of 2016 according to the National Bureau of Statistics.
Kenya’s M-pesa was designed as a service for the unbanked in emerging markets . M-pesa, Africa’s poster child of Fintech innovation (powered by Safaricom), boasts of over 30 million users in 10 countries powering over 6 billion transactions in 2016 alone. While PagaTech amongst many other Nigerian money transfer systems and payment processing services like Quickteller, Voguepay, Remita, Cashenvoy, PayWithCapture, AmplifyPay, ETranzact, KongaPay and many others still gaining traction, Paga is the only money mover that comes close to M-pesa’s ball park powering over 9.5 million transactions in 2016 alone worth over ₦156 billion. Paga’s reach in comparison to M-pesa is undeniably low but what can’t be pushed aside is its thriving mode of operation of deploying a network of field agents providing payment options to an underserved population. Paga understands that financial inclusion will take forefront in transforming the Nigerian financial system and its growth is inevitable.
In this race, there will be a few winners and a lot of losers. Larger fintech companies can build nation and continent-wide distribution of their product while smaller companies fight for the little pie in P2P transfer and micro payments. Smaller companies will do well innovating and creating new exciting products for consumers but they will have to grow fast enough to tackle the incumbents. With publicly available APIs, anyone with technical know-how can create the most basic P2P money transfer service while dropping transfer costs even lower but can they scale it before the larger companies clone? Fintech startups must create a well-designed, segmented, and integrated customer experience, rather than use one-size-fits-all distribution or risk playing catch up and die.
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